Guide to Starting and Operating a Small Business | 2018 Guide to Starting and Operating a Small Business - Page 25

Advantages • All the benefits of LLC structure • Qualification as PRI (Program Related Investment), facilitating foundation investments • Not subject to nonprofit regulation • Branding and marketing opportunities Disadvantages • PR investments are rare and considered risky, with potential excise tax liability to the foundation • So new that there are many unresolved questions about how rules and regulations will be interpreted and applied Corporations A corporation is considered a separate legal entity with its own rights, privileges and liabilities separate from its owners. Therefore, its shareholders or stockholders (owners) are not personally responsible for the debts of the business unless they personally guarantee those debts. Usually a corporation has more than one shareholder but it can be 100% owned by one person. A Corporation’s governance structure has three layers: Shareholders who elect a Board of Directors who oversee major policies and decisions, and Officers hired or appointed by the Board of Directors to run the company on a day-to-day basis. The rights and obligations of Shareholders are generally set by Michigan law, and the rights and obligations of Directors and Officers are established in private Bylaws adopted by the incorporators. A corporation may be more expensive and complex to establish than the other business structures because of the three-tiered organizational structure. Corporations must abide by corporate formalities required by statute to retain corporate status; therefore, corporations are more complex to operate than sole proprietorships and partnerships. A corporation is created by filing Articles of Incorporation with Michigan Department of Licensing and Regulatory Affairs (LARA) along with the appropriate fee. The corporation will also be responsible for paying an annual fee with LARA to continue its existence. Corporations are characterized for tax purposes as “C” corporations by default by the IRS. A “C” corporation (the entity itself) pays taxes at special corporate tax rates on the profits it earns and retains. Corporations distribute earnings to shareholders (owners) as dividends and the shareholders are taxed on this income. Therefore, it is said that corporate earnings are subject to “double taxation”: once at the corporation level and once at the shareholder level when they are passed through as dividends. However, qualified small businesses (corporations and LLCs) may file an election with the IRS to be treated as a subchapter “S” corporation. There are eligibility requirements to becoming a subchapter S corporation including but not limited to having 100 or less shareholders or members. Subchapter S entities do not pay taxes on the earnings of the business but instead the income is passed through to the individual shareholders or members and reported on their personal income tax returns. This eliminates the corporate “double taxation” of C-corporations described above. Advantages • Easier to raise capital through sale of stock • Limited liability for business debts – shareholders only risk their investment • Easy to transfer ownership • Can elect Subchapter S status with the IRS Disadvantages • More expensive to set up and maintain than other entity types • Corporate formalities are complex but must be strictly followed to maintain corporate status and limited liability of shareholders • Closely regulated by both federal and state government • Double taxation if not eligible for or fail to elect Subchapter S status with the IRS 23